Dubai Islamic Bank reported an annual 12 per cent rise in first quarter net profit, beating analysts’ estimates, as the biggest Sharia-compliant lender in the country considers the acquisition of rival Noor Bank.

Net income for the three months ending March 31 climbed to Dh1.34 billion, the lender said in a bourse filing to the Dubai Financial Market, where its shares are traded. It beat the highest estimates of analysts polled by Bloomberg.

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The DIB board on Tuesday also approved to “explore possible acquisition of Noor Bank” and submit a report within three weeks, it said in a separate statement to the stock exchange.

“In order to support the analysis and findings”, the board approved the appointment of financial advisors to conduct due diligence of Noor Bank and “provide fairness opinion on the valuation”, it said.

Earlier this month DIB said it's looking at acquisitions, among other options, as part of its expansion strategy. A potential acquisition of Noor Bank would create a lender with Dh275 billion in assets. The Investment Corporation of Dubai is the biggest shareholder in DIB with a 28.37 per cent stake, according to the bank's website. ICD also owns 22.85 per cent of Noor Bank.

Common shareholdings in financial institutions usually are the main drivers of mergers as the stakeholders strive to create leaner and more efficient entities to face challenging market conditions in the wake of a slowing global economy.

Acquiring Noor Bank would be beneficial to DIB and help consolidate the UAE's overcrowded banking sector, according to Egyptian investment bank EFG Hermes. There is room for more tie-ups among local lenders as the UAE is overbanked with 22 local and 38 foreign banks, most of which have "sub-optimal" market shares, it said earlier this month

Merger of lenders across the region is gathering pace. In the UAE, Abu Dhabi Commercial Bank is in the process of merging with Union National Bank and taking over Al Hilal Bank, which would create the third-biggest lender in the country. In Saudi Arabia, National Commercial Bank is pursuing a merger with Riyad Bank.